What is UXD Protocol, Algorithmic Stablecoin on Solana?

Updated on 4 November, 2022 7:09 AM
1 min read

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    Before diving into what UXD Protocol is, let us gain a deeper understanding of an algorithmic solana stablecoin protocol. It is essentially a self-executing protocol that is used to maintain price stability. This price stability is maintained by minting or burning internal assets. 

    So, here is a brief overview of Solana, one of the many decentralized exchanges in the market. It is known to be the fastest growing blockchain worldwide, with a rapidly growing ecosystem in cryptocurrency. Its projects range from Decentralized Finance (DeFi) to NFTs (Non-Fungible Tokens). As the name suggests, decentralized finance aims to remove intermediaries in the process of online transactions. For laymen, NFTs are Non-Fungible tokens that people often use to safeguard their digital assets from copyright infringement. Solana supports smart contract functionality, and its native cryptocurrency is SOL. 

    The UXD Protocol is built on Solana and was founded in 2020. Its initial name was Soteria. Solana had to decide on a new name for its stablecoin as there was already another Soteria in the market. The protocol’s devnet app was launched in October 2021, and its mainnet in November 2021. It is pegged at $1 USD.

    What is a stablecoin?

    A stablecoin is a cryptocurrency whose value remains the same over time as its price is usually pegged to fiat, exchange-traded commodities, or other cryptocurrencies. In this blog, we will detail the UXD protocol built on the Solana blockchain that is deemed to have all the essential features that a stablecoin must possess.

    UXD Protocol Stability Mechanism

    The stability mechanism adopted by the UXD Protocol is unique as no other crypto offerings currently have this type of mechanism in place. It uses on-chain perpetual futures contracts (also known as perpetual swaps) for creating on-chain delta neutral positions that are stable in dollar terms. For people wanting to know more about delta-neutral positions, grab a coffee and continue reading the blog!

    The UXD protocol is known to hold collateral assets like BTC (Bitcoin) and SOL. It simultaneously shorts the same asset through a futures contract. It holds a long position and a corresponding short position on the same asset, ensuring that it has no exposure to price fluctuations of the asset itself. This is a delta-neutral position. It is stable in dollar terms, irrespective of the asset’s price fluctuation. The position is then tokenized to create a stable crypto-dollar. With the help of UXD Protocol’s construct, the “stablecoin trilemma” could be solved, allowing UXD token to be decentralized, capital efficient, and stable.

    How does the UXD Protocol function?

    Users deposit crypto collateral into a smart contract to mint UXD token. This creates a delta-neutral position on Solana decentralized exchange.

    Historically, funding rates have been positive for the crypto space. This opportunity can be exploited in multiple ways. For example, an important use of positive funding rates will enable continuous capitalization of the protocol’s insurance fund. If the funding rate turns negative, the protocol must pay it. These payments will be withdrawn from the protocol’s insurance fund so that UXD token holders never have to pay.

    The UXD Protocol’s insurance fund will be capitalized through a token sale. When the funding rate is positive, and the protocol brings in funds, a portion of these funds will be directed to the insurance fund to ensure safe capitalization.

    How to mint UXD token?

    Users can follow the given steps to mint UXD token on the platform:

    Step 1: Ensure that your wallet is connected to the protocol. You can choose phantom wallet for the same. If you don't know how, you can read more about how to create phantom wallet here.

    Step 2: Select the asset to be swapped with the UXD stablecoin on Solana

    Step 3: Just click on mint to execute the minting process.

    Features of UXD Protocol

    • Accessible by all users as it does not require fiat backing.
    • Stability due to its delta-neutral position and backed by USD.
    • Non-custodial/permissionless minting and/or redeeming

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